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Rapid LNG growth to drive M&A activity

A search for scale and diversity is likely to motivate corporate moves

An upsurge in corporate activity—such as mergers and acquisitions (M&A)—is likely as industry players seek to evolve to create value as global LNG trade doubles between now and 2035, according to a report published on Tuesday by Petroleum Economist in association with law firm Shearman & Sterling.

LNG trade is expected to grow even more quickly—at around 4pc pa, according to some estimates—than the overall demand for gas, which is itself widely projected to be the fastest-growing energy source over the coming decade-and-a-half, because of the need to connect gas resources with distant markets.

“Growth is likely to manifest not just as a rise in the volumes of LNG produced and traded, but in the number of exporting countries, the number of importing countries, and the number and diversity of industry players,” says the report, noting that the number of LNG-importing countries has risen from 18 in 2008 to 42 in 2018, as Bangladesh and Panama joined the club, with “more waiting in the wings”.

It projects that LNG trade will grow to over 470mn t/yr by 2024, as supply projects that have already taken final investment decisions reach start-up.

The past three years have seen a surge in M&A activity as existing players have consolidated their positions. Shell and Total—the two largest portfolio players, that is aggregators of supply and sales contracts that today play crucial roles as intermediaries between producers and end-buyers)—have been particularly active.

There is also growing interest on the part of national oil companies (NOCs) to exploit what Saudi Aramco describes as “significant opportunites”. It recently agreed to take a 25pc equity stake—along with a 20-year, 5mn t/yr offtake contract—in the proposed US Port Arthur LNG export project, as part of a strategy “to become a leading global LNG player”.

The ‘Big Three’ Chinese NOCs already have a track record of investing in LNG projects abroad, and may see M&A as a means of bolstering LNG supply security in what is the world’s fastest-growing market.

M&A activity is also likely to be driven by differing response to the climate challenge, says the report. “We have already seen companies such as Engie and Iberdrola divesting their LNG businesses to focus on low/zero-carbon energies, and in the process creating M&A opportunities.

“It is conceivable that this trend will gather momentum, to the extent that some large oil and gas companies decide to divest their oil interests to focus on natural gas and electricity. We could perhaps see the emergence of a new breed of gas/LNG/electricity super-majors, as scale and integration downstream become the prerequisites of value creation.”

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